Many financial transactions involve a customer making a payment to a merchant in exchange for goods or services. Many times the payment is in a promissory form, such as a check that instructs the customer's bank to pay the merchant from a demand deposit account (DDA). A DDA is an account, such as a checking account, whose balance can be drawn upon on demand without prior notice. As is well known, the funds promised by the check are sometimes not paid, due to reasons such as insufficient funds in the customer's checking account or fraud. Examples of fraud include, but are not limited to, payments made with checks or debit cards that are stolen, counterfeit, or written for accounts that no longer exist. Thus, although it may be considered good business practice for a merchant to accept promissory DDA payments, the merchant is taking a risk whenever a check or other promissory DDA payment is accepted in exchange for goods or services.
In order to manage these and other financial transaction risks, some merchants subscribe to a service that assesses risks associated with financial transactions. For a given check transaction, a subscribed merchant can send a point-of-sale transaction approval request to the service with information, such as check amount, account identification, and check-writer identification. The service assesses the risk and either authorizes or declines the transaction based on the risk assessment.
In order to assess a transaction risk, the service typically calculates a risk score by inputting information about the check, the check writer, and the merchant into one or more algorithms. The algorithms return a risk score that is indicative of the transaction risk. A typical check approving process typically comprises a cutoff risk score such that a transaction whose risk score is higher than the cutoff risk score is authorized. Conversely, a transaction whose risk score is lower than the cutoff risk score is declined.
However, there are costs associated with performing the algorithms and calculating the risk score. Calculating the risk score consumes costly processor time. In addition, when the merchant has a high volume of transactions, calculating the risk score for each transaction can cause a significant delay in completing the transaction for the merchant and the customer.